RRSP Special Issue

In this issue, we will focus on how the markets behaved last year, and with the annual RRSP rush, what the limits are, what to invest in, and who contributes to RRSPs, and who shouldn't.

2005 In Review: What happened in 2005 and Where to invest for 2006

Last year was a good one for Canadian investors, with rising energy prices moving the Canadian market to 5 year highs. While this cost us as consumers with higher heating bills and at the gas pumps, it benefitted most investors. (See video on hedging your energy costs)

On the other hand, 2005 was a disappointing year for investors in global equity markets – despite surprisingly good growth in corporate profits. The MSCI World Index was up less than 3% in Canadian dollar terms and just over 5% in U.S. dollars.

The gap between the performance of the World Index in Canadian dollars and U.S. dollars once again reflects the continued strength of the loonie, which rose by about 4% against the U.S. dollar, by 17% against the euro and 22% against the yen. The 20 cent, three year rise from 65 cents to 85 cents is unlikely to be repeated.

This may well present an opportunity to rebalance from high Canadian equity positions and take advantage of the strong dollar to build up international holdings.

In the income securities market, rising short-term interest rates caused bonds to underperform equities for the year, while low bond yields led to continued demand for dividend income, supporting prices in the preferred share market. There remains huge demand for any security that provides a higher yield than government bonds, which is why income trusts remain so popular among Canadian investors.

With uncertainty over the direction of taxation of trusts seemingly settled by the government’s decision to cut dividend taxes rather than raising them on trusts, the Canadian income trust market responded by reaching record highs in mid-December.

Overall, the investment climate remains positive for 2006. Interest rates, while trending upward, are still relatively low on a historical basis. Caution signs include the dollar’s strength, which could act as a brake on the important Canadian export market, and energy prices, which would force consumers to cut spending on other items.

Where does that leave you for this year's RRSP investments? Have a look at our recommended funds list (link below) for ideas. We've updated it for 2006.

Also, our top new idea for this year are target date retirement funds or lifecycle funds. New to Canada, these funds automatically rebalance over time becoming more conservative as you approach retirement. We have prepared a summary of these funds on our lifecycle page (link below). Of those funds currently on the market, we like Fidelity's offering best.

More on investment ideas for RRSP contributions

RRSP Contributions on the Rise

Who Contributes?

More Canadians socked more money away in RRSPs in 2004. Statistics Canada says contributions totalled nearly $28.8 billion, up 4.5 per cent from 2003, after a 1.8 per cent increase in 2002.

Just over six million people who filed taxes contributed to an RRSP last year, around 1/3 of those tax filers eligible to do so. But although total contributions were $28.8 billion, that was just eight per cent of total room that tax filers had to invest in RRSPs. The median contribution was $2,600.

What are the RRSP Limits?

The limits for 2005 (i.e. this tax season) are 18% of 2004 earned income to a maximum of $16,500.

The limit for 2006 will go up to 18,000.

The deadline for making a contribution to use against your 2005 taxes is March 1, 2006.

Who should Contribute?

Almost everyone. The only people who may want to reconsider making an RRSP contribution this year are:

individuals earning less than $25,000 a year, as their current marginal tax rate is as low as their retirement tax rate may be;

those with RRSPs and/or pensions so large that they will earn over $60,000 a year in retirement and risk having their OAS clawed back (e.g. those with current RRSPs over $750,000);

those whose income may be going up in the next few years – they can contribute, but should consider not claiming their contribution until they have a high income year.

RRSP Order Sheet

Use our handy form to make your RRSP contribution

If you would like to top up your RRSP, please use the updated form below to help simplify your contribution.

Your Mutual Fund Reality Check

We can provide analysis of how your funds are really performing

Not quite sure how your funds or your overall account are performing? In addition to your monthly statement, we would be pleased to provide you with a mutual fund reality check, a summary of how your funds have performed over the last 1, 3, 5 and 10 years. We can also perform this analysis on any investments you may still hold elsewhere, for comparison purposes. Contact us for more details.

More on fund performance

Annual Labour Fund Review

In September 2005, the Ontario government announced that provincial tax credits are to be phased out starting in 2008 (the last year for the 15% provincial credit), and eliminated completely in 2010. Currently, there are no plans to reduce or eliminate Federal tax credits.

Performance in this sector is illustrative of the wide variety in funds and their underlying assets. Three-year returns range from 29.5% to –31.7% (period ending 11/30/05 – Morningstar).

With knowledge of the reduction in tax credits, some LSIF managers have been moving away from equity-based venture capital portfolios and introducing new products with performance tied to regular income generated by debt financing, or mixed portfolios of venture and larger cap equity in the portfolio.

The hope is that consistency in performance will win back investor confidence in this sector. However, with the recent suspension of redemptions at Retrocom Growth Fund, investors may well be skeptical about future investments.

Amid the new products available, there are still a wide variety of growth oriented investments available from funds focused on the oil & gas sector to those specializing in health and life sciences research.

Uncertainty is on the horizon, however, for the future of some of the smaller players in this sector. In an environment of increased consolidation in the Mutual Fund industry, the specialized area of small LSIFs may soon be forced to follow suit.

Our annual review of labour funds for 2006 is now available. As part of our ongoing monitoring of your account we review any LSIF holdings, and will be in contact if you have any LSIFs available for tax free rollover or redemption. For any questions on LISFs, please contact our LSIF specialist,
Andrew McGoey.

More on labour funds

Ontario Ending Mandatory Retirement

The Ontario Government recently announced that reaching age 65 is no longer reason for mandatory retirement. The change eliminates discrimination based on age and fortunately, does not mean that anyone must work past that age, unless they want to.

AGF Elements

AGF Elements portfolios to pay rebates if they lag benchmarks

AGF Funds Inc. announced on Nov. 28 the launch of a new series of
five AGF Elements Portfolios, four of which will rebate portions of
their management fees if they fail to meet their performance benchmarks.
The portfolio funds of funds will invest entirely in AGF funds. Asset
allocation advice is provided by Santa Monica, California-based Wilshire
Associates Inc. The rebates, known as Elements Advantage Distributions,
will be paid in the form of additional units. A holding period of at
least three years will be required to qualify for a rebate.

We like the idea of a performance guarantee, but a lower management fee works just as well for us. We'll reserve judgment on this program for now...

More on AGF Elements

What is your burn rate? With Canadian savings rates at historical lows, it is worth asking if you can afford to keep your husband, your wife, your kids? Keeping your spending under control is key to having enough at retirement. Here is a humourous look at your spending decisions.

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